How will Selinger government use PST hike to fund infrastructure?

The NDP government's plan to increase the provincial sales tax, and use the money on infrastructure has been obscured by a swarm of questions since it was first introduced.

What kind of infrastructure will be funded by a proposed one-point increase in the PST?

KEN GIGLIOTTI / WINNIPEG FREE PRESS ARCHIVES

How much of the total spending will go to municipalities?

How will the province track the spending, and ensure the revenue from the increased PST translates into a net increase in total infrastructure spending, year over year, for the decade the tax hike is in effect?

These may seem like simple questions, but eliciting a clear, accurate picture is a very complicated matter. Infrastructure funds are drawn from numerous departments. Some of it is cost-shared with other levels of government. Some of it is done in cash and other projects by borrowing.

All this might explain why the NDP government has had a difficult time explaining exactly where it plans to spend its $1.8-billion infrastructure budget.

Perhaps because he is the Manitoba legislature's resident ninja master of obfuscation, or perhaps because it's a complicated subject, Ashton was unwilling or unable to provide an answer.

After several weeks of inquiries, the Free Press acquired what is likely the most complete picture of how the NDP government plans on spending its $1.8-billion infrastructure budget. Information on specific projects was not available; Premier Greg Selinger will spend the next six months travelling the province to announce infrastructure projects. Government officials were thus reluctant to steal his thunder.

Here are some important questions about infrastructure spending, and the best answers available.

Why is it so difficult to figure out where the province is spending its infrastructure dollars?

The province announced in its April budget it was creating the Manitoba Building and Renewal Plan (MBRP), an envelope that captures nearly $1.8 billion in infrastructure spending in the 2013-14 fiscal year.

That figure includes a lot of what you would expect: roads, bridges and sewers. However, it also includes:

New or renovated schools, including colleges and universities;

Provincial housing;

New or renovated health-care facilities, including medical equipment;

Renovation and replacement of public-service buildings;

Larger, strategic infrastructure projects such as Centreport, the expansion of the Winnipeg Convention Centre and the completion of the Red River Floodway expansion;

Cost-shared investments in recreation and cultural facilities;

Upgrades to provincial park infrastructure and services;

Flood mitigation and prevention infrastructure including community dikes and diversions;

New or enhanced water and sewage facilities and systems.

How much of the money will go to basic infrastructure?

Many of the lobbies and special-interest groups that have weighed in on the PST hike have demanded the new money be spent only on "basic infrastructure." Unfortunately, nobody knows exactly what that term means, although the best definition seems to be roads, bridges and water/sewage.

The province does not make any distinction between basic and non-basic in its infrastructure portfolio. However, in the back offices of government -- the place where numbers get crunched -- there is a distinction made between "horizontal" infrastructure (roads, bridges and water/sewage); and "vertical" infrastructure (structures).

The argument for focusing new revenue from the PST increase on horizontal infrastructure is two-fold. First, it is often argued it is the greatest and thus most pressing need in the so-called infrastructure deficit, the total value of all the work that needs to be done but for which there is no money. Second, it has been argued investments in horizontal infrastructure represent a better overall value for government. In other words, horizontal infrastructure creates a bigger economic bang.

How much of Manitoba's total budget is being devoted to basic, horizontal infrastructure, and how much is going to vertical projects?

Vertical infrastructure, which includes larger, strategic projects such as Centreport and the Winnipeg Convention Centre expansion, totals about $1 billion; that leaves about $800 million to be spent on horizontal infrastructure. Of that figure, the gross majority of the money ($622 million) will go to provincial highways and regional roads.

Does this mean municipalities are getting short-changed?

Municipal leaders have been very clear that they believe the new MBRP cheats them out of much-needed infrastructure money. They wanted the estimated $280 million in additional annual revenue from the PST hike dedicated solely to municipal projects.

So, how much of the $1.8 billion goes to municipalities? Money flows to local government in two forms: money dedicated to infrastructure, and general assistance that may or may not be spent on infrastructure.

In dedicated infrastructure funds, local governments receive about $71 million from the MBRP envelope. However, that is far from the only benefit for municipalities.

For example, the province pays 100 per cent of the costs of provincial highways, many of which run right through the middle of municipalities. The province paid for the reconstruction of Highway 75 through Morris -- although it is a provincial highway, it is also Morris's main street. That is undoubtedly a benefit to the municipality, even though there's no grant.

In addition, it's virtually impossible to find a municipal pool, arena, soccer pitch, or library project that isn't cost-shared with the province. Mayors and reeves fail to mention the millions of dollars that flow into their communities through those budget lines, but the benefits are incontrovertible.

The same argument can be made for hospitals and schools. Municipal leaders claim the biggest need for their communities is basic infrastructure, but it's fairly safe to say taxpayers value good schools and hospitals at least as much as roads and sewers.

No empirical distinction can be made between a taxpayer dollar spent on a road and a dollar spent on a school or provincial housing unit.

David Macdonald, senior economist for the Canadian Centre for Policy Alternatives, said for every dollar invested in infrastructure of any kind, government can count on about $1.06 of economic activity. This is why governments focus stimulus spending on infrastructure; it's hands down the best way to use public money to expand the economy in times of slow growth.

However, provincial infrastructure spending is more vulnerable to "leakage" than similar programs at the federal level. If a contractor spends some of the monies provided by government on labour or materials outside the jurisdiction where the project is located, the economic benefits are eroded.

That is not a problem on very basic infrastructure projects; no contractor working in Manitoba would seriously look at sourcing concrete, asphalt, or gravel from outside the province. However, on a complex project, there is a possibility contractors could source unique building materials outside the province.

Macdonald said most contractors and subcontractors, even if they are sourced from outside a province, would pay income taxes in the province where the work is performed.

The bottom line is the economic impact of an infrastructure project is determined by how many people it employs. And a new school can employ just as many as a road reconstruction. "The projects that employ more people have a higher economic multiplier," he said.

The PST increase, and the 'pledge.'

The NDP government promised in its spring budget to devote the equivalent of two points of the new, eight per cent PST to infrastructure. Over a full fiscal year, that would mean 25 per cent of all PST revenue -- estimated right now to be anywhere from $560 to $600 million -- would go annually to infrastructure.

This is where things get weird.

The province already spends considerably more than that on infrastructure. In fact, the province has spent more than $1 billion on infrastructure annually since 2009. It seems unlikely, verging on impossible, to see total spending go below $560 million.

So, how are we supposed to hold the NDP government to account for its pledge to use the PST hike to eat into the province's infrastructure deficit?

In a context in which the province is already spending considerably more than the 25 per cent of PST revenue, we need to look at the current fiscal year as the baseline. That is to say, to keep its promise, the province cannot spend less than it spends this year.

Manitoba is budgeted to spent $1.8 billion this year, which would be about $370 million more than it did last year. There is every reason to believe the province will actually spend a bit less than $1.8 billion; problems with tendering, unforeseen construction snags and the vagaries of cost-sharing programs usually lead to the delay of some projects. Last year, for example, total infrastructure spending was $1.423 billion, $296 million less than budgeted.

In the current year, the province says it will collect just less than $200 million from the new, higher PST. To keep its promise, the province cannot spend less than $1.62 billion in the current fiscal year; anything less than that, and an argument could be made that not all of the money went to infrastructure.

In future years, it gets a bit more difficult to establish an annual baseline on which to judge the PST pledge.

It is possible for the province to drastically reduce its total infrastructure spending and, in the process, nearly wipe out its current deficit. However, that would be by any measure a violation of the government's pledge on the tax hike.

Selinger said the tax hike meant more spending on infrastructure. That would mean 'more' than what the government is spending right now.

Certainly, an argument could be made that total infrastructure spending has to increase at the rate of PST revenue. That would mean that 25 per cent of all increases in PST revenue above current levels must be added annually to the infrastructure budget. And that total infrastructure spending would have to increase by an amount equal to 25 per cent of the total increase in PST revenue each and every year.

The bottom line?

For now, the PST hike does mean more money for infrastructure. Critics who claim the money would have a bigger impact if it was either given directly to municipalities, or spent on one type of project, have little empirical basis for that position. The hard economics of infrastructure make no distinctions between provincial and municipal, or horizontal and vertical.

In future years, however, it will prove increasingly difficult for the NDP government to show definitively whether it has kept its original pledge.

$123 million: Community infrastructure (includes grants for rural and northern infrastructure, assistance to Winnipeg and other municipalities and money for municipal diking);

$71 million: Public service buildings (Buildings that contain provincial programs and employees, including everything from courthouses, jails and remand centres to rural community government offices, and even the Manitoba legislature.)

NOTE: Flood prevention/infrastructure costs in this year's budget account for $105 million; $61 million is included in the $1.8-billion MBRP. Excluded costs are for things such as protection on private property, which is not included in infrastructure spending.

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